Boom or Bust Impact of Business Cycles Economics

Boom or Bust Impact of Business Cycles Economics LAP 9

Objectives Explain the phases of a business cycle. Summarize causes of business cycles.

Explain the phases of a business cycle.

• Jessica waits tables. Her income is not steady. • The restaurant’s business varies a great deal. • Everyone experiences economic ups and downs.

The Ups and Downs of Business Cycles • Each business cycle consists of periods of expansion and contraction. Ø Expansion—growth in economic activity Ø Contraction—decline in economic activity • Affects production, consumption, exchange, and distribution

Business Cycles and Real Gross Domestic Product (GDP) • Increase in real GDP—economy grows • Decrease in GDP —economy declines

Business Cycles and Other Economic Indicators • Unemployment Ø Increase in unemployment— economy declines Ø Decrease in unemployment— economy grows • Inflation Ø Increase in inflation—economy is booming Ø Drop in inflation—economic activities slow down

Benefits of a Growing Economy • Providing a high standard of living • Creating new and additional jobs • Enabling the government to fulfill its duties more thoroughly • Resolving domestic problems

Taking Steps to Avoid Extreme Ups and Downs • Businesses can: Ø Make plans to smooth out extreme fluctuations Ø Anticipate necessary changes in employment, production, pricing, and purchasing

The Unpredictability of Business Cycles • Can’t accurately predict: Ø The length or severity of business cycles Ø The exact beginning and ending of a business cycle

Phases of Business Cycles • Expansion • Peak • Contraction • Trough

Expansion: Growth in Economic Activities • Consumers’ incomes increase. • They spend more on durable goods. • Business profits increase. • New businesses open. • Existing businesses invest in new equipment and facilities.

Expansion: Growth in Economic Activities • Demand increases. • More workers are hired. • The money supply increases. • Interest rates decrease.

Peak: High Point of Economic Activity • Demand for products exceeds supply. • Prices and interest rates rise. • Consumers begin to spend less. • Producers begin to invest less.

Contraction: Decline in Economic Activity • Consumers spend less and save more. • Businesses postpone purchases. • Few new businesses are started. • Businesses earn less profit, experience losses, close, or decrease production. • Sales decline.

Contraction: Decline in Economic Activity • Inventories build up. • Unemployment rises. • Prices decrease. • Interest rates decrease. • Social problems increase.

Recession and Depression • Recession—widespread economic contraction for an extended period of time (at least six months) with unemployment of 10 -12% • Depression—prolonged, severe decline Ø Many business failures Ø Unemployment of up to 25% or more

Trough: Low Point of Economic Activity • Many more businesses fail. • Unemployment is very high. • The economy will stay at this low point until consumers and producers begin to buy more. • Hitting rock bottom implies that a recovery is on its way.

Summarize causes of business cycles.

Demand Supply Demand-pull inflation Internal Causes of Business Cycles • Aggregate demand • Money supply • Investment in capital goods • Inventory levels

External Causes of Business Cycles • Political changes • Climatic changes • International relations • Discoveries and innovation • Psychological changes

• Which phase of the business cycle are we experiencing? • How have you been affected? • Are you doing better or worse? • What will the economy look like in a year? • How can you prepare for that future?

• Some economists claim business cycles are caused by politicians. • Supposedly, in the months leading up to an election, government leaders focus on economic expansion.

• After the election, an economic contraction occurs. Ø Is this possible? Ø Do our elected leaders cause business cycles? Ø If so, is it ethical? Ø Why or why not?

Acknowledgments Original Developers: Christopher C. Burke, Christine Morrison, MBA Research Version 2. 0 Copyright

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